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MBBP Q1 2012 VC Spotlight: Seed Convertible Note Discounts; Superior Court Ruling on Noncompetition Agreements 04/04/2012

Posted by Morse Barnes-Brown Pendleton in MBBP news, New Resources.
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Seed Convertible Note Discounts: Reconciling “Stock” and “Liquidation Preference” Premiums

Corporate Attorney Jonathan GworekBy: Jonathan Gworek

Convertible notes have become the security of choice for early stage startups looking to raise seed capital. Convertible notes are perceived to be a simpler alternative to preferred stock. When a convertible note converts, it typically does so at a discount to the price paid in the next round. As a result, the promissory note will convert into a number of shares that reflects a premium level of stock ownership. But there is a second and lesser appreciated premium often associated with convertible notes. When notes convert into the next round of equity at a discount, not only does the noteholder get more equity per dollar invested as described above, but the noteholder may also get the benefit of an aggregate liquidation preference that is associated with that premium number of shares.

It is important to recognize this distinction between the “stock ownership premium” and the “liquidation preference premium” that results from the conversion of notes at a discount. There are approaches that can be used to eliminate the liquidation preference premium if that is not the intended result of the discount. For a full discussion of the differences between the stock ownership premium and the liquidation preference premium resulting from the conversion of notes, and the alternatives that are available for dealing with the liquidation preference premium, please click here.

Superior Court Rules Start-up Can Enforce Former Executive’s Noncompetition Agreement

By: Scott Bleier

Corporate Attorney Scott BleierOver the past four years, there has been ample legislative discussion and speculation amongst lawyers regarding the enforceability of noncompetition agreements under Massachusetts law. During this time, multiple bills have been filed with the Massachusetts House of Representatives which, if passed, would substantially limit – and, in some cases, abolish – the enforcement of most noncompetition agreements. Notwithstanding this ongoing dialogue and a perceptible shift towards disfavoring noncompetition agreements in Massachusetts, a recent Superior Court decision illustrates that properly drafted noncompetition agreements continue to be enforced judicially in the Commonwealth and further serves to remind established and start-up companies alike of the need to be mindful of the impacts of these contractual restrictions. For more on this development, please click here.

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